RBC’s sets aside more money for bad loans stemming from oil price shock

TORONTO – Royal Bank (TSX:RY) is setting more money aside for bad loans as the extended period of low oil prices has made it tougher for both energy companies and consumers in oil-dependent provinces to pay their debts.

“There’s no question that the persistently low oil prices are tough for clients in the affected regions and are driving an increase in credit provisions in our portfolio,” RBC’s chief executive David McKay said during a conference call to discuss the bank’s first-quarter results on Wednesday.

“It’s important to note that the increase is off historic lows we’ve experienced in recent years and further I want to highlight that we’ve managed through many cycles.”

The bank reported net income of $2.45 billion for the quarter — flat compared to the same quarter last year and six per cent lower than the previous quarter, when it had $2.59 billion of profit.

Higher earnings from its wealth management and its main banking division were offset by weaker results from insurance and capital markets.

RBC also upped its provisions for credit losses to $410 million — an increase of $140 million, or 52 per cent — due to higher provisions in the oil-and-gas sector and in its personal lending and credit card portfolios.

“This time last year, the price of oil was around $50 a barrel, a level that we noted challenged the profitability of the sector,” RBC’s chief risk officer Mark Hughes told analysts during the conference call.

“The extended duration of low oil prices, which averaged $37 a barrel in (the first quarter), has put additional pressure on some of our clients.”

Provisions for credit losses in the bank’s capital markets segment rose by $84 million to $121 million during the quarter due to losses related to four oil-and-gas accounts and one utility account.

Hughes said the bank has run updated stress tests to see how its loans to the oilpatch would perform under a variety of scenarios, including $30 a barrel oil for the remainder of the year.

As a result of these tests, RBC has added nine companies to its energy watchlist for monitoring. It isn’t naming those companies.

Meanwhile, in its personal and commercial banking segment, provisions rose $44 million to $284 million as unemployment in oil-exposed provinces rose.

“Against this backdrop, we continue to actively monitor shifts in our clients’ financial patterns to ensure we maintain visibility into early signs of stress,” said Hughes. “We did see delinquencies move up this quarter from historical lows in our residential mortgage portfolio in Alberta.”

The bank has also run stress tests to see how the entirety of its loan portfolio would perform if a perfect storm of factors were to ensue, including oil remaining at $25 a barrel for the remainder of the year, Canada slipping into a recession and house prices plummeting nationwide by as much as 25 per cent.

“In what we believe to be an unlikely scenario at this point, provisions based on this macro stress test would increase to 40 to 50 basis points, which is within our historic average,” said Hughes.

Despite the challenging economic environment, McKay said he believes that pressure stemming from low oil prices will remain contained within energy-dependent provinces, while the benefits of the low loonie on Canada’s manufacturing and export activity will help support “modest” GDP growth this year.


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